Strong Dollar Policy

At full employment, a strong dollar is good for standards of living. A high price for the dollar means that our currency buys a lot in foreign countries. But in a depressed economy, it isn’t so clear that a strong dollar is desirable. A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.

This is more or less the economic-y answer; the one I learned sitting on the intellectual knee of the good and the great.

Yet, I have come to doubt it recently. There will be a couple of strand of thought here. As usual you are getting undigested musings and analysis.

First, as Michael Pettis points out – if a strong currency is so good, how come so many countries are reluctant to receive this bounty. We could say – as is typical in economics – different strokes for different folks. But, when everyone seems not to want what you’ve got this should at least make you stop and wonder.

Second, all of sorts of things that the public feels are “bad” come from a strong dollar. Manufacturing jobs are more scarce. The public and private sectors are encouraged to run-up more debt. There is “overconsumption.”

Now, yes I have the natural economist tendency to scoff at all of this and tell the public that these are great things. If we can make cars with a printing press rather than with autoworkers that’s a good thing, not a bad one.

That is, foreigners want to hold dollars. However, for them to get dollars some American has to give them dollars. How do you make an American do that? Well, one way is to sell the American a car. He or she will then give you thousands of dollars in exchange.

However, since what you want is the dollars themselves and not US goods and services, the American has essentially gotten the car simply by using the printing press. The printing press shoots offs some dollar bills. We give the dollar bills to foreigners, they give us a car and everyone has a nice day.

This is appealing. But, why do people persistently act as if this is undesirable? Maybe they all simply misunderstand the world. Or, maybe our analysis is incomplete. Maybe the problem is that the dollars must originally come through increased borrowing by someone. The Fed is not just handing out Benjamins after all.

Maybe the fact that all of this has to run though the Financial System implies that the financial system is able to capture all of the benefits, leaving the average American only at a competitive disadvantage employment wise.

I don’t know, but I am interested.

Third, I have been thinking about preferences over beliefs. Bryan Caplan awoke me from my dogmatic slumber over this issue. People want to believe certain things. Rational irrationality and all that.

(Yes, some of my family and friends will complain that I floated the phrase rational rationality well over a decade ago but that had a different meaning. It was about issues that now come under the heading of limited attention.)

Anyway, people have preferences over beliefs. Well then shouldn’t those preferences count for something? And, if so how do we count them? Suppose everyone just wants a strong dollar. No reason. They just want it.

Is that somehow less meaningful than wanting to eat a burrito? If so why?

Now if that ain’t twisted enough, exactly what are we doing if we convince them not to want it? Are we doing good? Are we helping people? If it is good to help people achieve their preferences then is it bad to alter their preferences towards something they have not achieved?

I realize that the effect here might be small in comparison to the massive effects of movements in the dollar but it reminds me other issue and I think the issue is at least intriguing.

3 comments

Very good post. I’ve always understood the effect of the USD on trade flows and borrowing as being an arrangement where essentially we export financial instruments in exchange for goods. This marginally realigns the US economy towards the finance sector (40% of corporate profits in 2008) and away from other tradable goods sectors.

Also, if one assumes that credit in the US is subsidized from abroad by this arrangement, households, corporations, and government would be marginally tilted more towards debt and away from equity.

So the instead of printing money and getting a car we give them IOU’s and they get marginally better skills and learning by doing to make better cars and related capital equipment.